Earnings Roundup: Aon plc (NYSE: AON)

On Monday, Shares of Aon plc (NYSE: AON) declined -0.22% to $144.23. The stock traded total volume of 926,538 shares lower than the average volume of 1.07M shares.

Aon plc (AON) recently stated results for the three months ended September 30, 2018.

Net income (loss) from continuing operations attributable to Aon shareholders on a stated basis was $149.0M, or $0.61 per share, contrast to $189.0M, or $0.73 per share, in the prior year period, which includes $(81.0)M, or $(0.31) per share, of unfavorable impact from adoption of the new revenue recognition standard. Net income per share from continuing operations on a comparable basis, adjusted for certain items and the impact of adoption of the new revenue recognition standard, increased 34% to $1.31, counting an unfavorable impact of $0.05 per share related to foreign currency translation, contrast to $0.98 in the prior year period.

THIRD QUARTER 2018 FINANCIAL SUMMARY

Total revenue in the third quarter was flat at $2.30B on a stated basis contrast to the prior year period, counting a decrease of $117.0M, or 6%, related to adoption of the new revenue recognition standard. Excluding this impact, comparable revenue increased $126.0M, or 6%, contrast to the prior year period driven by 6% organic revenue growth and a 2% increase related to acquisitions, net of divestitures, partially offset by a 2% unfavorable impact from foreign currency translation.

Total operating expenses in the third quarter were flat at $2.10B on a stated basis contrast to the prior year period, counting a decrease of $18.0M related to adoption of the new revenue recognition standard. Excluding this impact, comparable expenses increased $21.0M contrast to the prior year period due mainly to a boost in expenses associated with 6% organic revenue growth, a $38.0M increase in operating expenses related to acquisitions, net of divestitures, a $4.0M increase in errors and omissions expense, and investments across the portfolio to support long-term growth programs, partially offset by $50.0M of incremental savings related to restructuring and other operational improvement programs, a $34.0M favorable impact from foreign currency translation, a $25.0M decrease related to reduced legacy litigation expense, a $10.0M decrease in transaction related costs associated with acquisitions, an $8.0M decrease in costs related to regulatory and compliance matters, and a $5.0M decrease in restructuring charges.

Restructuring expenses were $97.0M in the third quarter, mainly driven by costs associated with restructuring and separation programs and workforce reductions. As formerly declared, the Company anticipates to invest $1,175.0M in total cash over a three-year period and incur $50.0M of non-cash charges in driving one operating model across the firm. This includes an estimated investment of $975.0M of cash restructuring charges and $200.0M of capital expenditures. The Company has incurred $863.0M, or 84%, of the total estimated restructuring charges. An analysis of restructuring and related costs by type is detailed on page 18 of this press release.

Restructuring savings in the third quarter related to restructuring and other operational improvement programs are estimated at $105.0M before any reinvestment, a boost of $50.0M contrast to the prior year period. Before any potential reinvestment of savings, restructuring and other operational improvement programs are expected to deliver run-rate savings of $450.0M annually in 2019. The Company has achieved $308.0M, or 68%, of the total estimated annualized savings, before any potential reinvestment.

Foreign currency exchange rates in the third quarter had a $5.0M, or $0.02 per share, unfavorable impact on stated net income if the Company were to translate prior year quarter results at current quarter foreign exchange rates. On a comparable basis, there was a $13.0M, or $0.05 per share, unfavorable impact from foreign currency translation on net income adjusted for certain items and the impact of adoption of the new revenue recognition standard. If currency were to remain stable at today’s rates, with the U.S. Dollar strengthening further against Latin American currencies, we would expect an unfavorable impact of about $0.06 per share in the fourth quarter of 2018, which translates into about $18.0M of unfavorable impact to operating income.

Weighted average diluted shares outstanding reduced to 245.60M in the third quarter contrast to 257.30M in the prior year period. The Company repurchased 2.10M Class A Ordinary Shares for about $300.0M in the quarter.  As of September 30, 2018, the Company had $4.20B of remaining authorization under its share repurchase program.

THIRD QUARTER 2018 CASH FLOW SUMMARY

Cash flow from operations for the first nine months of 2018 increased $686.0M, or 237%, to $975.0M contrast to the prior year period. The prior year period included $686.0M of cash tax payments related to the divestiture of the outsourcing business. Strong operational improvement contributed to year-over-year growth, partially offset by $123.0M of incremental cash restructuring charges and $80.0M of accelerated pension contributions.

Free cash flow, defined as cash flow from operations less capital expenditures, increased $632.0M, or 385%,  to $796.0M for the first nine months of 2018 contrast to the prior year quarter reflecting a boost in cash flow from operations, partially offset by a $54.0M increase in capital expenditures, counting investments in our operating model.

Adjusted free cash flow, defined as free cash flow excluding certain near-term impacts resulting from the divestiture of the outsourcing business, counting restructuring programs, increased $57.0M, or 5%, to $1,163.0M contrast to the prior year period.

THIRD QUARTER 2018 REVENUE REVIEW

Total revenue increased $9.0M on a stated basis, counting a decrease of $117.0M, or 6%, related to adoption of the new revenue recognition standard. Excluding this impact, revenue on a comparable basis increased $126.0M, or 6%, contrast to the prior year period, counting organic revenue growth of 6% mainly driven by strong new business generation and retention globally across our core portfolio, as well as double-digit growth in specific areas of continued investment; counting cyber solutions, delegated investment management, transaction liability, and voluntary benefits.

Compensation and benefits expense reduced $36.0M, or 3%, on a stated basis, counting an $8.0M decrease related to adoption of the new revenue recognition standard. Excluding this impact, compensation and benefits expense on a comparable basis reduced $28.0M, or 2%, contrast to the prior year period due mainly to $42.0M of incremental savings related to restructuring and other operational improvement programs, a $34.0M decrease in restructuring costs, a $25.0M favorable impact from foreign currency translation, and a $2.0M decrease in transaction related costs associated with acquisitions, partially offset by a boost in expense associated with 6% organic revenue growth, a $28.0M increase in expenses related to acquisitions, net of divestitures, and investments in Aon United growth programs.

Information technology expense increased $16.0M, or 15%, contrast to the prior year period due mainly to investments to support Aon United growth programs, counting $8.0M of investment in application development, and a $5.0M increase in expenses related to acquisitions, net of divestitures, partially offset by $4.0M of incremental savings related to restructuring and other operational improvement programs.

Premises expense increased $5.0M, or 6%, contrast to the prior year period due mainly to a $7.0M increase in restructuring costs and a $3.0M increase in expenses related to acquisitions, net of divestitures, partially offset by $6.0M of incremental savings related to restructuring and other operational improvement programs. Depreciation of fixed assets was flat contrast to the prior year period.

Amortization and impairment of intangible assets reduced $1.0M, or 1%, contrast to the prior year period.

Other general expenses increased $19.0M, or 6%, on a stated basis, counting a $10.0M decrease related to adoption of the new revenue recognition standard. Excluding this impact, other general expenses on a comparable basis increased $29.0M, or 9%, contrast to the prior year period due mainly to a boost in expense associated with 6% organic revenue growth, a $22.0M increase in restructuring costs, a $4.0M increase in errors and omissions expense, and investments to support long-term growth programs, partially offset by a $25.0M decrease related to reduced legacy litigation expense, an $8.0M decrease in costs related to regulatory and compliance matters, and an $8.0M decrease in transaction related costs associated with acquisitions.

THIRD QUARTER 2018 INCOME SUMMARY

AS STATED

Operating income increased $6.0M, or 2%, on a stated basis contrast to the prior year period, counting a decrease of $99.0M, or 39%, related to adoption of the new revenue recognition standard. Operating margin increased 30 basis points on a stated basis contrast to the prior year period, counting a decrease of 380 basis points related to adoption of the new revenue recognition standard.

Adjusting for certain items and the impact of adoption of the new revenue recognition standard detailed on page 11 of this press release, adjusted operating income on a comparable basis increased $66.0M, or 18%, and adjusted operating margin on a comparable basis increased 190 basis points to 18.5%, each contrast to the prior year period. The increase in adjusted operating margin on a comparable basis was mainly driven by accelerating organic revenue growth, counting strong growth in areas of continued investment across the portfolio, and $50.0M, or 210 basis points, of incremental savings from restructuring and other operational programs, partially offset by a $4.0M, or -20 basis points, headwind from the timing of increased errors and omissions expense and a $13.0M, or -20 basis points, unfavorable impact from foreign currency translation. Core operational improvement of $33.0M, or 9% of operating income growth, and +20 basis points of operating margin expansion contrast to the prior year period also reflects the absorption of near-term investment in client-facing colleagues and capabilities to support long-term Aon United growth programs.

Interest income reduced $10.0M as the prior year period included additional income earned on the proceeds of the sale of the outsourcing business. Interest expense reduced $1.0M to $69.0M contrast to the prior year period reflecting lower outstanding term debt, partially offset by a boost in commercial paper borrowings. Other pension income (expense) included $9.0M of pension income, offset by $9.0M of non-cash expenses related to pension settlements. Excluding the non-cash expenses related to pension settlements, pension income of $9.0M is similar to the prior year period. Other income was $1.0M, mainly reflecting gains on certain company owned life insurance plans, partially offset by net losses because of the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies and losses on the disposal of certain assets. The prior year period included $150.M of net losses because of the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies, partially offset by $10.0M of gains mainly related to certain long-term investments.

SUSPENDED OPERATIONS

Net loss from suspended operations on a stated basis was $2.0M, or $(0.01) per share, contrast to net loss of $4.0M, or $(0.01) per share, in the prior year period.

AON has the market capitalization of $34.61B and its EPS growth ratio for the past five years was -0.80%. The return on assets ratio of the Company was 2.90% while its return on investment ratio stands at 9.90%. Price to sales ratio was 3.17 while 91.60% of the stock was owned by institutional investors.

Grover Beam

Grover Beam has over 14 years experience in the financial services industry giving him a vast understanding of how news affects the financial markets. He is an active day trader spending the majority of her time analyzing earnings reports and watching commodities and derivatives. He has a Masters Degree in Economics from Westminster University with previous roles counting Investment Banking.

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